Horizons Global Call: A Mix of Problems and Opportunities

A security guard stands in the lobby of the Reserve Bank of India headquarters in Mumbai.

Reuters

By Michael J. Casey, Alen Mattich and Michael Arnold

Horizons Global Call, a new daily blog post, covers the main macroeconomic and policy news events affecting foreign-exchange, fixed income and equity markets around the world, as selected by editors in New York, London and Hong Kong.

1. WRAP: Our selection of news items today offers a reminder that now, more than ever, investors need to pay attention to differentiating domestic factors across countries. We find Indians grappling with twin current account and fiscal deficits that can only be resolved through a continued brake on spending, Indonesians worrying whether rate hikes have gone too far in a slowing economy, and Japanese citizens contemplating the prospect that their decades-long deflation problem is finally ending. Meanwhile, Spain’s seven-year-long housing decline continues while Britain undergoes a new property boom.

Even at a time when grand, sweeping trends appear to be affecting the global economy in a monolithic way–the recent selloff in emerging markets, the recovery in European economies–individual government policies create unique problems and opportunities in different places.

India’s growth has almost halved from the 9.3% rate it recorded in the year ended in March 2011, hurt by widening fiscal and current account deficits. Today’s downgrade was no surprise, but formalizes the fact that the government and central bank so far have had no success in stopping the downward spiral afflicting India’s real economy and financial markets. All eyes are now on new central bank governor Raghuram Rajan to see if his physical charms–the Indian press is swooning over his good looks–can be matched with policy magic to sway the market as well. But the structural problems of India’s economy will be a stiff challenge, even for the poster boy in the central bank.

Thursday’s move took markets by surprise, but failed to bolster the rupiah on Friday. Some economists warned that tightening into a slowing economy is dangerous, but Perry Warjiyo told the Journal that Bank Indonesia will be careful to avoid excessive tightening. He also said the extent of the current-account deficit–4.4% of GDP in the second quarter–is an indication that Indonesia’s economy was growing too fast relative to its peers.

The report follows a series of indicators showing that Japan’s economic outlook is brightening–including this week’s sharp upward revision to second-quarter GDP–and many economists expect Tokyo’s hosting of the 2020 Olympics will provide a further boost. Still, a Cabinet Office official who briefed reporters Friday said the economy hasn’t yet fully entered a “virtuous cycle” of self-reinforcing progress.

5. SPAIN: House prices dropped 0.8% in Q2 on the previous quarter and were down 12.0% year on year, against falls of 6.6% and 14.3% respectively in Q1.

Could it be that after a 36% fall over the past five years, Spanish property prices are finally starting to stabilize? Don’t bet on it. A mix of inheritance and bankruptcy laws that make it both difficult and disadvantageous for debt-strapped home owners to sell has left a giant overhang of unsold properties. This has meant that housing prices still haven’t found their natural bottom, even though the Spanish property boom, which left millions of empty and unfinished condominium developments dotted across the country, came to its abrupt halt one year before America’s. Indeed, the Spanish central bank isn’t convinced that the worst is over: it expects a glut of property to keep downward pressure on the market for some time.

6. U.K: It’s a very different housing story in Britain, where a new housing boom appears to be under way. The latest evidence of this: July construction output was up 2.2% on the month and 2% on the year while the growth rate was revised up to a 1.9% rise from the originally reported 1.4%. New construction orders surged 19.8% in Q2 on the previous quarter to hit the highest volume in more than three years.

Although much of the gain in new orders was driven by infrastructure, not least wind farms, this has put house construction at its highest level since the end of 2007. It looks like the government’s drive to get credit flowing into the property sector is working and is helping to revive the economy. Unfortunately, it’s also feeding fears that a fresh housing bubble is forming just six years after the last one burst.

7: Coming up:

a. U.S: 8:30 am EDT. August Retail Sales. [Expected +0.5% on month vs. +0.2% in July; ex-Autos seen +0.3% vs. +0.5%]. Other than the jobs report, most indicators from August have suggested that the U.S. economy shrugged off the rise in market interest rates over the summer. Auto sales announced last week were the strongest indication of this. The government’s retail sales number will offer a more comprehensive picture.

b. U.S: 8:30 am EDT August Producer Prices Index. [Expected +0.2% on month vs. no change in July; core PPI expected +0.1% vs. +0.1%.] The consensus view is that there is no inflation in the U.S, which helps build the case that the Fed should hold off on tapering bond-buying. But this number in particular – a measure of price pressures in the economic pipeline – remains moderately vulnerable to pressure from higher oil prices, even if the core estimate, which strips out energy prices, is expected to stay soft.